Which of the following apply to a partnership that consists solely of general partners?
I. double taxation of partnership profits
II. limited partnership life
III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts
A. II only
B. I and II only
C. II and III only
D. I, II, and IV only
E. II, III, and IV only
Answer:
The common set of standards and procedures by which audited financial statements are
prepared is known as the:
A. matching principle.
B. cash flow identity.
C. Generally Accepted Accounting Principles.
D. Financial Accounting Reporting Principles.
E. Standard Accounting Value Guidelines.
Answer:
Which one of the following best describes pro forma financial statements?
A. financial statements expressed in a foreign currency
B. financial statements where the assets are expressed as a percentage of total assets and
costs are expressed as a percentage of sales
C. financial statements showing projected values for future time periods
D. financial statements expressed in real dollars, given a stated base year
E. financial statements where all accounts are expressed as a percentage of last year’s
values
Answer:
A sinking fund is managed by a trustee for which one of the following purposes?
A. paying interest payments
B. early bond redemption
C. converting bonds into equity securities
D. paying preferred dividends
E. reducing coupon rates
Answer:
A bond’s coupon rate is equal to the annual interest divided by which one of the
following?
A. call price
B. current price
C. face value
D. clean price
E. dirty price
Answer:
An analysis of the change in a project’s NPV when a single variable is changed is called
_____ analysis.
A. forecasting
B. scenario
C. sensitivity
D. simulation
E. break-even
Answer:
Which one of the following statements related to the internal rate of return (IRR) is
correct?
A. The IRR yields the same accept and reject decisions as the net present value method
given mutually exclusive projects.
B. A project with an IRR equal to the required return would reduce the value of a firm if
accepted.
C. The IRR is equal to the required return when the net present value is equal to zero.
D. Financing type projects should be accepted if the IRR exceeds the required return.
E. The average accounting return is a better method of analysis than the IRR from a
financial point of view.
Answer:
Galaxy Products is comparing two different capital structures, an all-equity plan (Plan
I) and a levered plan (Plan II). Under Plan I, Galaxy would have 178,500 shares of
stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and
$1.79 million in debt outstanding. The interest rate on the debt is 10 percent and there
are no taxes. What is the breakeven EBIT?
A. $287,878.78
B. $298,333.33
C. $351,111.11
D. $333,333.33
E. $341,414.14
Answer:
The Cellar Door currently sells 9,620 units a month for total monthly sales of $316,000.
The company is considering replacing its current cash only credit policy with a net 30
policy. The variable cost per unit is $15 and the monthly interest rate is 1.5 percent.
What is the switch break-even level of sales?
A. 9,711 units
B. 9,779 units
C. 9,814 units
D. 9,957 units
E. 9,889 units
Answer:
Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The
bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent.
What is the current bond price?
A. $985.55
B. $991.90
C. $1,042.16
D. $1,089.02
E. $1,098.00
Answer:
Never Again Enterprises has an agreement with The Worth Bank whereby the bank
handles $3.12 million in collections a day and requires a $1,000,000 compensating
balance. Never Again is contemplating canceling the agreement and dividing its eastern
region so that two other banks will handle its business. Banks A and B will each handle
$1.56 million of collections a day, and each requires a compensating balance of
$1,550,000. Never Again’s financial management expects that collections will be
accelerated by one day if the eastern region is divided. The T-bill rate is 4 percent
annually. What is the amount of the annual net savings if this plan is adopted?
A. $10,200
B. $40,800
C. $76,500
D. $102,000
E. $125,000
Answer:
Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The
incremental value of the acquisition is $4,600. Firm A has 8,500 shares of stock
outstanding at a price of $36 a share. Firm B has 5,900 shares of stock outstanding at a
price of $27 a share. What is the value per share of Firm A after the acquisition?
A. $35.28
B. $35.71
C. $36.00
D. $36.15
E. $37.04
Answer:
Which one of the following statements correctly applies to U.S. industrial firms based
on the period of 1984-2004?
A. Earnings growth rates tend to lag dividend growth rates.
B. Dividends tend to fluctuate significantly from quarter to quarter.
C. The percentage of these firms paying dividends in 2004 was higher than in 1984.
D. The total amount of dividends paid by these firms was greater in 2004 than in 1984.
E. Non-dividend paying firms in 1984 were more apt to commence paying regular
dividends than to implement a stock repurchase program.
Answer:
Which one of the following factors tends to favor longer credit periods?
A. high consumer demand
B. lower priced merchandise
C. increased credit risk
D. merchandise with low collateral value
E. increased competition
Answer:
Which one of the following time periods is included in the accounts receivable period
but not in the cash collection period?
A. the period of time between the receipt of a check and the availability of those funds
B. time it takes a firm to process incoming receipts
C. period of time a check is in the mail
D. the amount of time that it takes a bank to credit a firm’s account for a deposit made
E. period of time it takes an invoice to reach a customer by mail
Answer:
A firm has a debt-total asset ratio of 74 percent and a return on total assets of 13
percent. What is the return on equity?
A. 26 percent
B. 50 percent
C. 65 percent
D. 84 percent
E. 135 percent
Answer:
Inventory needs under a derived-demand inventory system are:
A. primarily dependent upon the competitive demands placed on a firm’s suppliers.
B. based on the anticipated demand for the finished product.
C. based on minimizing the cost of restocking inventory.
D. held constant over time.
E. determined by a kanban system.
Answer:
You are considering a project which will provide annual cash inflows of $4,500, $5,700,
and $8,000 at the end of each year for the next three years, respectively. What is the
present value of these cash flows, given a 9 percent discount rate?
A. $14,877
B. $15,103
C. $15,429
D. $16,388
E. $16,847
Answer:
The Mountain Top Shoppe has sales of $512,000, average accounts receivable of
$31,400 and average accounts payable of $24,800. The cost of goods sold is equivalent
to 71 percent of sales. How long does it take The Mountain Top Shoppe to pay its
suppliers?
A. 21.76 days
B. 22.38 days
C. 24.90 days
D. 25.89 days
E. 26.67 days
Answer:
Naylor’s is an all equity firm with 60,000 shares of stock outstanding at a market price
of $50 a share. The company has earnings before interest and taxes of $102,000.
Naylor’s has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to
repurchase shares of the outstanding stock. Currently, you own 500 shares of Naylor’s
stock. How many shares of Naylor’s stock will you continue to own if you unlever this
position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
A. 322 shares
B. 350 shares
C. 362 shares
D. 425 shares
E. 502 shares
Answer:
The average annual return on small-company stocks was about _____ percent greater
than the average annual return on large-company stocks over the period 1926-2010.
A. 3
B. 5
C. 7
D. 9
E. 11
Answer:
You own shares of a stock and believe the stock price will increase in the future.
However, you realize the stock price could decline and want to hedge that risk. Which
one of the following option positions should you take to create the desired hedge?
A. buy a call
B. sell a call
C. buy a put
D. sell a put
Answer:
The optimal capital structure has been achieved when the:
A. debt-equity ratio is equal to 1.
B. weight of equity is equal to the weight of debt.
C. cost of equity is maximized given a pre-tax cost of debt.
D. debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E. debt-equity ratio results in the lowest possible weighted average cost of capital.
Answer:
Southern Tours is considering acquiring Holiday Vacations. Management believes
Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over
the next three years, respectively. After that time, they feel the business will be
worthless. Southern Tours has determined that a 13.5 percent rate of return is applicable
to this potential acquisition. What is Southern Tours willing to pay today to acquire
Holiday Vacations?
A. $503,098
B. $538,615
C. $545,920
D. $601,226
E. $638,407
Answer:
Which one of the following will increase the value of a firm’s net working capital?
A. using cash to pay a supplier
B. depreciating an asset
C. collecting an accounts receivable
D. purchasing inventory on credit
E. selling inventory at a profit
Answer:
Frank’s Auto Repair can purchase a new machine for $136,000. The machine has a
4-year life and can be sold at the end of year 4 for $12,000. Frank’s uses MACRS
depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41
percent depreciation over years 1 to 4, respectively. The equipment can be leased for
$35,900 a year. The firm can borrow money at 7.5 percent and has a 32 percent tax rate.
The company does not expect to owe any taxes for at least the next 4 years due to net
operating losses. What is the incremental annual cash flow for year 4 if the company
decides to lease rather than purchase the equipment?
A. -$47,900
B. -$35,900
C. -$20,900
D. $15,900
E. $35,900
Answer:
Lassiter Industries has annual sales of $220,000 with 10,000 shares of stock
outstanding. The firm has a profit margin of 6 percent and a price-sales ratio of 1.20.
What is the firm’s price-earnings ratio?
A. 14
B. 16
C. 18
D. 20
E. 22
Answer:
Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the
proper methodology for computing the depreciation expense for year 2 if the equipment
is classified as 5-year property for MACRS?
A. $67,000 × (1 – 0.20) × 0.32
B. $67,000/(1 – 0.20 – 0.32)
C. $67,000 × (1 + 0.32)
D. $67,000 × (1 – 0.32)
E. $67,000 × 0.32
Answer:
Assume that the returns from an asset are normally distributed. The average annual
return for the asset is 18.1 percent and the standard deviation of the returns is 32.5
percent. What is the approximate probability that your money will triple in value in a
single year?
A. less than 0.5 percent
B. less than 1 percent but greater than 0.5 percent
C. less then 2.5 percent but greater than 1 percent
D. less than 5 percent but greater than 2.5 percent
E. less than 10 percent but greater than 5 percent
Answer:
Motor City Productions sells original automotive art on a prepaid basis as each piece is
uniquely designed to the customer’s specifications. For one project, the cash flows are
estimated as follows. Based on the internal rate of return (IRR), should this project be
accepted if the required return is 9 percent?
A. Accept the project.
B. Reject the project.
C. The IRR cannot be used to evaluate this type of project.
D. The firm should be indifferent to either accepting or rejecting this project.
E. Insufficient information is provided to make a decision based on IRR.
Answer:
Suppose you purchase a September cocoa futures contract at the last price of the day as
shown in the table below. What will be your profit or loss on this contract if the price
turns out to be $1,707 per metric ton at expiration?
Futures:
Cocoa – 10 metric tons, $ per ton
A. $30
B. $110
C. $150
D. $1,100
E. $1,500
Answer: